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TL;DR: Go suddenly almost all in ~$400k-450k in an index fund, or is that crazy?

In mid 40s, married, with a good amount of earned/scrimped cash, small retirement accounts ($60k total), and self-bashing regrets on what might have been by now had I invested.

But all I can do now, really, is move ahead--I want to finally change this pattern, possibly this week. And I'm thinking of just going nearly all in: something like buying an index mutual fund with Vanguard or someone and just putting most of our cash, like $400-$450k, in it and retaining maybe $50k (?) as an emergency buffer in 2% interest bearing accounts. I know the market is high, but then again, the conventional wisdom seems to be to ignore that.

Is this insane? Or is insane not to?

My goals, ideally, would be:

  • To move closer and closer to financial independence and early semi/retirement
  • In the meantime, we're willing to work a few more years in more lucrative ($40k-$100k) jobs. Right now we're barely earning anything, though.
  • Really just build the warchest.
  • Look ahead to a home purchase, possibly (Range? $80k-$300k depending on area)
  • And stop scrimping so much.

I'm, of course, afraid that I will have waited out the last decade+'s massive growth only to dump our life's savings at a potentially very weird time in U.S. history: this president seems a major wildcard), PE ratios are very high apparently... And maybe we could see another 2008 crash but no recovery or...or who knows. That would just be the ultimate body slam--after missing out on what would have made us basically retired by now, to then set us back 15 years in savings due to a "bet" on the market.

So...your thoughts on someone like me going, probably impulsively (after a loooong wait) almost "all in"????

Are there any tax consequences of buying in with such a large chunk? Other consequences I should know about?

Is keeping $50k out of the market too risk-averse? I know JoeTaxpayer here has discussed being 100% in the market.

  • When you say you're willing to work a few more years in more lucrative jobs, do you mean that you're working in lucrative jobs and willing to continue to do so for a few years, or that you're currently not working in lucrative jobs but are willing to do so? – Hart CO Apr 8 '17 at 13:38
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    @HartCO Sorry, I'll edit that. Currently neither of us are earning much money at all. We're essentially unemployed, have been for a while, and are trying to see what the career future should be. – IBitAChip Apr 8 '17 at 15:39
  • That doesn't really change answers much given that on average a lump sum investment is a better approach, but it makes your scenario a bit different, as risk-aversion for many is affected by earning potential. – Hart CO Apr 8 '17 at 15:49
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We can't know the future, of course, but we know that on average it's better to invest a lump sum. We can look at some periods of recent history to get a sense of the difference between a lump sum 450k investment and maybe say 5 years of 90k.

Using S&P 500 return rates, let's say you started investing on Jan 1, 2008:

Year    S&P Return  Lump      5 year spread
2008    -36.6%     $285,525      $ 57,105 
2009    25.9%       359,590      185,264 
2010    14.8%       412,881      316,058 
2011    2.1%        421,552      414,585 
2012    15.9%       488,537      584,764 
2013    32.2%       645,601      772,766 
2014    13.5%       732,886      877,244 
2015    1.4%        743,000      889,350 
2016    11.7%      $830,228      $993,759 

Here, spreading your investing over 5 years earns you an extra $163k. Starting a year later, the same strategy would earn you $327k less than a lump investment:

Year    S&P Return  Lump    5 year spread
2009    25.9%       566,730      113,346 
2010    14.8%       650,719      233,482 
2011    2.1%        664,384      330,275 
2012    15.9%       769,955      487,057 
2013    32.2%     1,017,496      762,580 
2014    13.5%     1,155,061      865,681 
2015    1.4%      1,171,001      877,628 
2016    11.7%    $1,308,477      $980,661 

I looked at some other periods, but the story doesn't change from what we already knew; you can reduce risk of losing a big chunk due to a bad year, but it comes at the cost of potential gains. Perhaps you could make a killing by waiting for the next down-turn and buying on the cheap, or maybe you'll just be wasting time and money as the market enjoys sustained growth. I'd go with a lump, trusting the averages; but you're right, another 2008 with no recovery would suck.

As for holding $50k back it depends primarily on your monthly budget, many people suggest a 3-8 month liquid emergency fund, I like 6 months. Go with what you're comfortable with.

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    Welcome to Money.SE, and +1 for a brilliant first answer. I love that it only took choosing a difference of one starting year to exemplify the issue. – JTP - Apologise to Monica Apr 8 '17 at 15:36
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The obvious risk is that you might buy at a time when the market is particularly high. Of course, you won't know that is the case until afterwards.

A common way to reduce that risk is dollar cost averaging, where you buy gradually over a period of time.

  • The risk isn't that they buy when the market is high, but that they lock in loses when the market goes down. – Glen Pierce Apr 8 '17 at 16:55
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Your reaction to bad news is the greatest risk.

Are you going to panic and pull all your money out when the market falls 20%? It will. Someday it will. The question is, will you have the stomach to stay the course and keep your money invested when the sky is falling and everyone is screaming that things are definitely going to get worse?

If not, the timing of when you invest will matter not at all.

My advice: Go all in ASAP. Remember that you don't care where the market is in 2 years. You're in your mid 40's, you care where the market is in 20 years. And 20 years from now, when you're in your mid 60's, you'll be caring about where the market is even further into the future.

  • This is a great article about bear markets: bloomberg.com/news/articles/2016-01-26/… – Glen Pierce Apr 8 '17 at 15:15
  • Also note: the Dow has had two days in the last 10 years where it has increased in value by more than 10%. I'm not sure when the next one will be, but do you want to miss it? Source: en.wikipedia.org/wiki/… – Glen Pierce Apr 8 '17 at 15:22
  • This. The market WILL go down one day, maybe soon, maybe later. The important thing is to not lose money. That means buy low, sell high. When the market tanks, buy more. It's human nature to do the opposite: people like to buy high because they see all the previous missed opportunity and want to get in, then panic when the market dips and sell prematurely. Don't do that! – Rocky Apr 8 '17 at 16:19
  • @Rocky "people like to buy high because they see all the previous missed opportunity and want to get in, then panic when the market dips and sell prematurely." That could be me, at least the first part. I just think that even if I don't panic sell, I'm going to feel sick every day for years until the market recovers, and then also kick myself forever for not waiting until at least some of the dip had kicked in. – IBitAChip May 8 '17 at 1:55
  • @IBitAChip A bear market is a good thing if you are still saving and investing! Another way of looking at it: you're never going to be able to buy at the lowest low or sell at the highest high, so don't even bother to worry about it. – Rocky May 8 '17 at 16:46
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Your urge to invest is a good one. If you don’t invest your money, you're probably leaving about two thirds of it on the table. By the time you need the money (without knowing your exact future withdrawals, and taking national averages into consideration), investing would have grown it by three times.

As far as how much money you should invest...I invest everything I'm not going to use in the next month or two. My advisor is able to monitor my bank accounts and sweep any unused cash into investment accounts. Using AI, they're able to figure out exactly which days I'll be needing cash then put it back in my accounts before I need it. 1% of my portfolio is always kept in cash, for emergencies.

With investing, there are lots of things to consider. You need to decide what to invest in - spread your money over many different asset classes - monitor market trends - have a plan for market ups and downs - regularly rebalance - maneuver the fun world of taxes.

Basically - asset management.

Vanguard mutual funds are an easy, affordable way to spread your money over many different assets, but they don't offer much when it comes to asset management. I'd suggest you find a flat fee advisor (no more than 1% of your managed assets) who listens to you, determines your goals, creates a plan based on upon, then executes it with no commission or execution costs. In this particular vein, robo advisors are the best bet. I don't want to come across like I'm selling something, however, I have had much satisfaction with online digital advisors. Hope this helps.

  • Thanks! What's an example of an online digital advisor? Also, as I may post about, I am really reticent to enter the market now because of a number of concerns regarding Shiller CAPE and an overvalued market. I waited for years not go in and missed out hugely and I'm afraid I'm going to go all in and then take a huge loss. Yes, even if it recovers it's going to be years of pain until then and had I waited and entered at a dip (even if not the true bottom), such as what we saw in late 2008 early 2009, I could have made up for my past awful mistakes. Thoughts? – IBitAChip May 8 '17 at 1:48
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No one knows if the market is high right now. To know that you would need to compare it to the future, not the past.

If you put all your money in right now, you run the risk of putting it in at what turns out to be a bad time. If you spread it out, you will for sure put some of it in at a bad time (either the stuff you put in now, or the stuff you put in later). The strategy that, on average, will make you the most money is to put everything in now. If your risk tolerance allows that (it sounds like it does) then I think going all in makes sense.

There really aren't significant downsides to buying a ton at once. You aren't going to move the needle on a big Vanguard fund with that amount and there isn't a tax consequence or anything to buying. Of course, when you sell, you will need to pay capital gains tax on any gains, but that's a later chapter.

The bigger consideration is to be smart right now about avoiding taxes. If your income is low, max out your Roth IRAs. If you need to you can later use that money for a house or you can pull the contribution part out at any time if you want without a penalty.

Is a $50K buffer too much? Normally I would say yes, it's excessive. I have 5 rather expensive kids and I keep $20K in cash, which seems high, if anything. However, if you are unemployed or your income isn't covering your expenses, then keeping a larger pot in cash makes good sense until your cash flow firms up. Setting $50K or something close to that aside sounds a lot like something I would do in your shoes.

BTW where are you finding a savings account that pays 2%?

  • Thanks. This year in order to reduce AGI, we need to max out traditional IRAs, so I don't think I can do that and also do a ROTH IRA, correct? The bank account at 2% is a local bank that has a high interest checking account, where you get 2% on up to 25k (and husband and wife can each have one) if you meet monthly requirements, mainly ATM card use. This site is a good place to search for them: depositaccounts.com/checking/reward-checking-accounts.html – IBitAChip Apr 8 '17 at 15:46
  • That is correct. Roth and Traditional combine toward the same contribution limit. If your income is relatively low, you may actually be in a situation where the tax savings today of using a traditional are less than the ultimate savings of using a Roth (i.e., your tax bracket may be higher in retirement than now). Good luck. – farnsy Apr 9 '17 at 19:29
  • Also, would you have the same advice to enter the market if I thought I might (with my wife) buy a home or two in the next few years? Something in the maybe 200k-300k range for both (I say two only because we're an international couple, so perhaps a small home to visit abroad, though a bit of a dream). – IBitAChip May 8 '17 at 1:53
  • It can certainly make sense to keep money in regular taxable accounts if you are expecting to use it to buy a house. For that matter, Roth IRA is a good place to keep money you might want to take out because you can take the contributions (not the gains) out at any time without penalty. If your money is in it for 5 years, you can actually pull out some of the gains also in order to buy a house. – farnsy May 8 '17 at 17:18

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